COHU - NASDAQ

Good day, and thank you for standing by. Welcome to Cohu's First Quarter 2024 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Jeff Jones, Chief Financial Officer. Please go ahead.

Thanks, Luis. Before I walk through the Q1 results and Q2 guidance, please note that my comments that follow all refer to non-GAAP figures. Information about the non-GAAP financial measures, including the GAAP to non-GAAP reconciliations and other disclosures are included in the accompanying earnings release and investor presentation, which are located on the Investor page of our website. Now turning to the Q1 financial results. Cohu delivered revenue and profitability above the midpoint of our guidance. Q1 revenue was $107.6 million. Recurring revenue, which is largely consumable-driven and more stable than systems revenue represented 66% of total revenue in Q1. During the first quarter, one customer in the automotive market accounted for more than 10% of sales. Q1 gross margin was 46%, about 100 basis points higher than guidance driven by better-than-forecasted margins on Cohu's resilient recurring business. Operating expenses for Q1 were lower than guidance at $50.2 million driven by lower labor and labor-related costs. First quarter non-GAAP operating income was approximately breakeven and adjusted EBITDA was 2.6%. Interest income, net of interest expense, loss on extinguishment of debt and a foreign currency loss of approximately $0.5 million was $1.6 million. Q1 pretax income consists of foreign profits combined with a loss in the U.S. The Q1 tax provision reflects tax on foreign profits, but no tax benefit from the U.S. loss, due to our valuation allowance against deferred tax assets. Additionally, the non-GAAP tax provision in Q1 of $300,000 is net of a one-time $2.7 million credit for the reversal of reserves for uncertain tax positions in foreign jurisdictions. Non-GAAP EPS for the first quarter was $0.01. Moving to the balance sheet. Cash and investments decreased by $64 million during Q1 to $271 million due to variable comp and payroll taxes totaling approximately $20 million plus $29 million used to pay off the remaining term loan B balance and approximately $11 million to repurchase 334,000 shares of Cohu common stock. CapEx in Q1 was $3.3 million with approximately $2 million related to our factories in the Philippines and Malaysia, supporting operations for our interface and automation businesses. Overall, Cohu continues to maintain a strong balance sheet to support investment opportunities to expand our served markets and technology portfolio in line with our growth strategy and return capital to shareholders through our share repurchase program. Now moving to our Q2 outlook. We're guiding Q2 revenue to be in the range of $105 million, plus or minus $6 million, reflecting continued weakness across end markets and low test cell utilization at customers' production facilities. Q2 gross margin is forecasted to be approximately 45%, better than the financial target model at this level of revenue due in large part to Cohu's differentiated products and our stable high-margin recurring business, which adds resilience to profitability and provides consistent cash flow through industry cycles. We expect gross margin to increase again when our revenue recovers with a broader semiconductor device market recovery and with better absorption of our factories infrastructure costs. Operating expenses for Q2 are projected to decrease about $1.5 million quarter-over-quarter to approximately $48.5 million due primarily to a reduction in force in optimizations as we completed certain product developments. As I noted during our last earnings call, we have taken action to reduce operating expenses without sacrificing critical new product investments while navigating through the trough of this cycle. As a result, we're now modeling operating expenses to average approximately $48 million per quarter in the second half of this year. We're projecting Q2 interest income net of interest expense and foreign currency impacts to be approximately $2 million at current interest rates. We expect Q2 adjusted EBITDA to be approximately 2%. The Q2 non-GAAP tax provision is expected to be approximately $1.6 million because of tax on foreign profits without benefit from the U.S. loss. Additionally, the $2.7 million credit recorded in Q1 is not expected to repeat in Q2. Until the markets recover, we expect a similar tax provision profile as we navigate through this cycle. The basic share count for Q2 is expected to be approximately 47 million shares. That concludes our prepared remarks, and now we'll open the call to questions.

[Operator Instructions] Our first question comes from the line of Brian Chin with Stifel.

Okay. Maybe just one quick question. Thanks, Luis, for Jeff. Just obviously, very high gross margins here at trough. I noticed you also raised the target model gross margin to 50%. Anything that goes into that in terms of composition of revenue mix at $1 billion? Or what considerations kind of go went into that increase?

Historical results really went into that decision to increase. We've sort of maintaining the same mix of product at that billion dollars of revenue with roughly 40% automation and 30% test, 20%, interface, 10% for inspection metrology. So that doesn't change. It's just we've seen better cost profiles, lower cost profiles, better margins. So that gave us the confidence based on what we've achieved here over the last, call it, 8 quarters to set the target to 50.

Our next question will come from the line of Ross Cole with Needham.

Our next question comes from the line of David Duley with Steelhead Securities.

Our next question comes from the line of Krish Sankar with TD Cowen.

[Operator Instructions] Our next question comes from the line of Craig Ellis with B. Riley.

Our next question comes from the line of Toshiya Hari with Goldman Sachs.

That concludes today's question-and-answer session. I'd like to turn the call back to Jeff Jones for closing remarks.

So I'd just like to close with saying thank you for joining our call today, and we look forward to seeing you soon.